Tag Archives: #bears

Chairman Powell Has Struck Out

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(With apologies to Ernest Lawrence Thayer)

The outlook’s quite uncertain for the ‘conomy this year
As there are those with strong belief the future’s bright and clear
But just as many seem to take a different view instead
And what they see is awful, with recession dead ahead.

The key discussion centers on inflation and its course
And whether central bankers, tighter money still endorse.
The bulls believe the Fed is done, with rate cuts coming soon
Thus, other central banks will quickly sing that selfsame tune.

The bears, however, see that global structures have now changed,
With tariffs and near-shoring rising, free trade’s now estranged.
The upshot is the bears believe that higher’s still for longer
As pricing pressures bubble thus, inflation grows much stronger.

The funny thing about this split in views is that both sides
May find that for a time this year their views will be good guides.
I think the bulls will run the show for quarters one and two
But as the year progresses weaker outcomes will come due.

Now let’s consider how the year is likely to begin;
With visions of soft-landings leading bulls to go all-in.
They see inflation sliding down to two or even one,
As yields on 10-year bonds fall back to Three before they’re done.

In sync with this they’re certain that the Dow and S&P
Will make new highs o’er 40K and 5K ‘spectively.
The dollar, in this view, has seen its highs for years to come
And so, they think the DXY, to Ninety-Five, will plumb.

This means the euro ought to trade as high as One Two-Oh
While dollar yen descends below One Thirty midst great woe
The pound is like to rise above One Forty in this wave
And pesos and reals explode as these, investors, crave.

The final data point for Goldilocks to make her case
Is oil needs to settle here and simply stay in place.
So, while good growth ought help support demand for Texas Tea
More oil will be pumped by nations recently set free.

This means the current policies where sanctions have relaxed,
Will show that barrels pumped will not have waned, but rather waxed.
And one last thing, the price of gold, will rally to new highs
As low real rates and central banks will lead gold bears’ demise.

I must admit that this sounds great if it can last all year
Alas, there are some issues which are likely to appear.
Come summer solstice cracks in this façade will start to show
And as the year winds down I fear unhappiness will grow.

The causes, proximate, will have to do with lags in time
As rate hikes o’er the past two years have changed the paradigm.
And though we’ll surely see the Fed and ECB respond
Twon’t be in time to stop the selling of the ten-year bond.

Instead, as growth conditions slacken each and every day,
The rate cuts will not be enough to halt the growth decay.
As well, a problem central banks are likely still to face
Is that inflation will go back above their target pace.

Stagflation is an awful word as it describes a state
Where prices rise too fast while growth just cannot germinate.
And this, dear friends, is what I fear will come to pass this year
By Christmas, bonds and stocks will fall while metals hit high gear.

So, what can we expect as Twenty-Four plays out in time?
The second half is likely to create a different clime
Than what we saw through June, when everything was filled with cheer
And stocks made record highs with greed ascendant over fear.

Instead, as summer turns to fall, inflation will come back
And late Q3 Chair Powell will have started to backtrack,
So rather than more rate cuts a new message will be sent
A pause, or maybe rate hikes are the future fundament.

This news will not be taken by the markets with aplomb
Instead, the first half rally will collapse like Pets.com.
And with inflation creeping higher Jay will have to choose
Twixt prices or the market, either way he’s sure to lose.

Some folks believe the ‘lection in November will impact
The Fed, though Jay will surely claim their mandate’s what they’ve tracked;
Now, if they fight inflation then the Dems will surely scream
But if they help the markets rise, poor Jay, the Pubs, will ream.

This means we need look deeply into Powell’s inner thoughts
And see if Arthur Burns or Chairman Volcker calls the shots;
My money’s on the tall one which means tighter policy
As only that can help cement Jay’s hero’s legacy.

With this in mind we’re like to see stocks peak sometime in June
And for the rest of Twenty-Four we’ll watch those markets swoon.
So, from the heights, Dow Forty K and Five K S&P
To Thirty K and Three-point-Five K Spooz, I do foresee.

As to the bond, despite the fact that growth will be lackluster,
Inflation won’t cooperate and so, Jay will be flustered.
While we may see one Fed funds cut before the summertime
The back end of the market will reverse, and yields will climb.

Come Christmas time I see the bond will yield ‘bout Five point Five
And all those levered bets are not too likely to survive.
As to the dollar, it should find its footing in the summer
And start to rise, which for the shorts, will really be a bummer.

So, think about a euro back ‘neath One Oh-Five or less;
And Dollar Yen above One Fifty, midst Ueda’s stress,
As poor Kazuo will not get to normalize his rates
And so, investment from Japan will flow back to the States.

The pound will suffer too, as like in Europe, growth will lag
And so, below One Twenty t’almost certainly will sag.
Emerging market currencies will have a better run
As rates are more supportive and no cuts need be undone.

In fact, when winter solstice on the calendar appears
Reals and pesos won’t have moved from where they closed last year.
Let’s now turn to the stuff that we can touch and see and smell;
Commodities like oil, though, for not too long we’ll dwell.

In concert, and a reason for inflation’s resurrection
Demand for oil only goes in one long-term direction.
So, more demand will drive the price back to One Hundred bucks
And if a wider war breaks out its June ‘Oh Eight redux.

The final price that I foresee in this unnerving tale
Is gold which ought to sparkle as most fiat moneys fail.
The Relic that’s called Barbarous will head above 3K,
And after this there’s just one thing I’ve really left to say.

Oh, somewhere in this great big world the sun is shining bright;
The ‘conomy is growing and inflation’s very slight.
But here at home stagflation is what Jay has brought about
There’ll be no joy in ‘Twenty-Four, Chair Powell has struck out!

To all my readers near and far, please know my sole intent
Is offering my viewpoint and it always is well-meant.
So, as we all embark upon Two Thousand Twenty-four
I thank you all for reading, for its you I all adore.

Thanks and Happy New Year
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Naught but Naive

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Right now, there are two distinct views
On prices and markets and news
For bulls it’s a time
For rapture sublime
While bears are all singing the blues

But there are still those who believe
The bullish view’s naught but naïve
Inflation’s not dead
And looking ahead
The bulls will have reason to grieve

As it is a US market holiday, with no equity or bond market trading, today’s observations will be brief.  While there are always two sides to the market story, I find that the recent gap between views is remarkably wide.  Perhaps this is because after more than a decade of ultralow interest rates, where whether one was bullish or bearish, the outcomes didn’t seem dramatically different, we are now in a situation where interest rates enter into investment decisions in a far more impactful manner.

 

Arguably, everything starts with the Fed, as well as its brethren central banks.  And this is the first place where opinions are so widely varied.  There is a growing camp that is certain that the Fed did not merely skip hiking rates last week while they observe the data, but that the rate hiking cycle is over.  This view is based on the strong belief that inflation is over, it is trending lower and that by the end of the year, not only will headline inflation be 2% or lower, but that core CPI will be following it down as well.  If this is your underlying belief set, it is easy to understand why you would be bullish on risk assets going forward.

 

The sequence goes something like this: tepid economic growth => rapidly falling inflation => end of Fed hiking cycle with eventual pivot to cuts => equity markets anticipating lower rates and growth rebound => Buy Stonks! 

 

Certainly, tepid economic growth seems to be the only part of the narrative that is widely accepted.  However, it is the inflation piece where different views start to drive the separation between camps.  Headline CPI (and likely PCE next week) has been falling on the back of the decline in energy and food prices compared with the immediate post Ukraine invasion situation.  The bullish argument also relies on the idea that due to the BLS methodology of incorporating housing inflation into its data with a significant lag, that the core number is going to start to decline sharply as well.  And it is this piece of the puzzle that is far harder to accept as a given. 

 

Thus far, there has been little to no evidence that core CPI is declining rapidly, in fact it is not declining at all and has been running around 5+% for a year now.  Perhaps wage pressures will collapse and eventually service prices will fall, but there is no evidence of that yet.  Perhaps home prices will fall sharply across the country, but there is no evidence of that either.  Rather, there are pockets of strength and pockets of weakness, but the overall data continues to show slow gains in prices.  As to straight rents (not OER), again, with Unemployment remaining low and wage gains evident, why is there a strong belief that rents are going to fall?  But all of this is part of the bull case, inflation is over, deflation is coming and the Fed is going to cut rates.  Oh yeah, AI!  AI is going to drive equity market values higher forever!

 

At the same time, the bear case essentially disagrees with the inflation collapsing thesis and points to the fact that the entire equity market rally this year has been on the narrowest breadth in history, with just 7  stocks accounting for the entire gain of the S&P 500.  So, 493 of the 500 companies are essentially unchanged on the year while 7 have had outsized gains and that is the definition of a bull market.  In the past, when market breadth had narrowed to levels currently seen, there has always been a retracement.  This is not to say that we are about to turn lower starting tomorrow (although risk was clearly off in the overnight session and in Europe as I type), but unless one is willing to believe that the entire economy will be driven by 7 companies going forward, changes seem likely.  And those changes mean repricing those seven leading companies lower.

 

Add to this view the idea that inflation will remain far stickier than the bullish narrative which means that interest rates are going to remain higher for longer (just like the Fed has explained) and having a bearish view is easier to understand.  Remember, too, there are a large percentage of companies in the S&P 500, something like 100 or so, that are zombies, defined as companies whose cash flows doesn’t cover their debt service and so they need to constantly borrow more to stay afloat.  There have already been more than 230 bankruptcies of companies with >$50 million in liabilities through the first four months of the year, a record pace.  Some are quite well-known, like Bed Bath & Beyond, and many are less famous.  But given T-bill yields are above 5%, there is much less search for yield and junk names have to pay a lot more for their funding.  Many of them will not be able to afford the new funding levels and will follow BB&B into bankruptcy.  This is not a bullish take.

 

So, that’s what we have, a growing gap between the bulls and the bears, with each side looking at the same data and seeing completely different things. (Sounds a lot like politics these days!)  Personally, I fall on the bearish side of the line, but you probably already knew that.  As time passes, I expect that we will see far less indication that inflation is over, and at some point, there will be capitulation.  But right now, the following graphic from CNN tells the story:

Good luck

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